Euro gathers strength above 1.1150 despite France’s fiscal concerns

The EUR/USD currency pair strengthened to around 1.1165 early Tuesday, but upward potential may be constrained by fiscal and political turmoil in France. The focus will now shift to upcoming US inflation data. French concerns over budget deficit control and a sharp bond market sell-off sparked fears of a possible Eurozone sovereign debt crisis.

Citi analysts warn that such fiscal risks could lead to the ECB pausing interest rate hikes after December, or earlier if instability spreads within the Eurozone. Meanwhile, Spanish PM Pedro Sánchez announced a snap general election for November 29, following parliamentary rejection of his government's housing decrees. In the US, Federal Reserve President Beth Hammack suggested a swift tightening of policy to curb inflation, which is seen as broader than previously thought.

Key US inflation reports are slated for release this week, which could influence the Federal Reserve's next steps. Experts at Societe Generale note that stagnating 10-year OAT/Bund spread has helped the EUR/USD and EUR/G10, but caution that the spread's mean reversion remains uncertain. Short positions in EUR/USD are at their highest since December 2024, indicating potential for a large repositioning if market conditions change.

Fed's Hammack's hawkish tone, with a 8.4/10 speechtrack score, highlights a preference for tighter policy. This is supported by the FXS Fed Sentiment Index, which stands at 138.92, firmly in a hawkish stance. On the technical side, EUR/USD is trading below the 100-day simple moving average and the Bollinger middle band, with resistance at the middle band and support at the lower band. A break below the lower band could signal further downside.